Introduction-Contextualization & Background.

News context

    • In order to challenge the United States’ hegemonic position, the BRICS nations are working together to develop a common currency.

    • In response to sanctions imposed by the West, Moscow and Beijing have called for a move away from the dollar.

    • The United States dollar is the currency used in international trade. Recently, there have been discussions regarding the creation of a new currency as a means of resisting American hegemony and dumping the dollar.

    • De-dollarization has been on the rise since the conflict that broke out between Russia and Ukraine in February.

    • The news that the nations that make up the BRICS group are creating a new payment medium that “does not defend the dollar or euro” gave a boost to this movement.

What’s de-dollarisation?

The United States dollar is the preeminent currency. Since 1944, it has served as the reserve currency for the entire world. The decision was made by the Bretton Woods Agreement, which included 44 Allied nations.

Since that time, the dollar has been in a strong position. It gives the United States a disproportionate amount of influence over economies around the world. The United States has long relied on sanctions as a tool in its foreign policy.

Both Russia and China have rejected the dominance of the dollar. De-dollarization lessens the importance of the dollar on a global scale. It entails dealing in commodities like oil and other goods using US dollars.

The western governments froze $300 billion of Russia’s foreign currency reserves, which is half of the total, and they banned Russian banks from using the Swift network last year.

“The so-called “WEAPONISATION” of the Dollar has shaken up a great number of countries, and not just Russia.

Issues

Advocates of De-dollarization:

• Those who support de-dollarization argue that it would lessen the reliance of other nations on the economy and currency of the United States.

• Divorce could cushion their economies from the effects of changes in the economic and political climate in the United States.

• Decrease exposure to currency and interest rate fluctuations in order to strengthen economic stability and lower the risk of financial crises.

• Reducing foreign exchange: According to a report published by the International Monetary Fund in 2022, central banks are holding fewer dollars as reserves. The percentage of the world’s foreign exchange reserves that is held in dollars dropped below 59% during the fourth quarter.

Advantages for the country like INDIA

• Rupee transactions conducted internationally help Indian companies hedge against currency risk. Security from cash instability reduces the cost of working and boosts business growth, which increases the global potential of Indian businesses.

 • Reducing India’s dependence on foreign currency will make the country less susceptible to the effects of external shocks. In the course of the US financial fixing and the strengthening of the dollar, a true homegrown fixing is caused by the unreasonable and unfamiliar cash liabilities of domestic businesses. The reduction of currency risk would help to mitigate the reversal of capital flow.

• It results in fewer savings from unfamiliar trade. Reserves have a negative impact on economic activity but have a positive effect on exchange rates and external stability.

As the rupee gains strength, the bargaining power of Indian businesses grows, which in turn boosts India’s economy and India’s standing in the global community.

Implications– “De-dollarization effect”

• A decrease in the demand for dollars The use of other currencies in international transactions, such as the euro or the yuan, may lead to a reduction in the demand for dollars held in the United States. This could have the effect of lowering the value of the dollar, which would increase the cost of imports into the United States and reduce the purchasing power of Americans while they are traveling abroad.

• A decrease in the United States’ ability to exert financial influence If the dollar were to lose its status as the world’s reserve currency, the United States might experience a reduction in its financial power. This could be harmful to the economy of the United States and its ability to borrow money at low interest rates.

• Volatility in currency exchange rates: As more countries move away from using the United States dollar, there is a possibility that currency exchange rates will become more volatile. This could make international trade more difficult and expensive.

• Benefits for other currencies If the U.S. dollar were to lose some of its global preeminence, other currencies like the euro or the yuan might become more widely used in financial transactions across international borders.

• Volatility in global markets: US bonds are falling as global demand for the US Dollar decreases, which is forcing banks like SVB to raise interest rates, which drains their liquidity and causes their company to collapse. Global economic collapse follows.

 Initiatives – “Structural & functional initiatives taken”

• India and China have begun conducting trade with RUSSIA in rupees and yuan, which has sparked discussion about the possibility of de-dollarizing the existing order in international trade.

• Brazil and China have begun conducting trade in yuan, which will help the Chinese renminbi become more accepted internationally and pose a challenge to the dollar.

• India is also looking to move away from the dollar. Trade in Indian rupees is now open to 18 countries, including the United Kingdom, Germany, Russia, and the United Arab Emirates. A forecast made by Nouriel Roubini in February suggested that the Indian rupee might one day serve as a reserve currency for the entire world.

• In order to facilitate trade, BRICS is considering the creation of a new currency. At the annual summit, which will take place in South Africa in August, the new financial agreement might be discussed.

Innovation -“The way ahead”

India’s plan: Rupee internationalization

Increasing the use of the rupee in international trade and commerce is what is meant by “internationalizing” the currency. Through the implementation of this strategy, the rupee will be supported in the context of import-export, current account, and capital account transactions.

Recently, the Deputy Governor of the RBI highlighted both the benefits and drawbacks of internationalizing the rupee. In July 2022, the Reserve Bank of India (RBI) initiated a process to simplify rupee-based international trade.

35 countries have expressed interest in receiving additional information regarding the rupee trade mechanism. Rupee trade with even a few of these countries would help India save on its foreign currency needs.

In addition, India is thinking about entering into trade agreements with countries that have large deficits. Rupee payments are beneficial to India when the country’s imports are higher than its exports.

The dollar used in trade right now is the US dollar. As a result, the value of the dollar can influence international trade. Transactions denominated in rupees lessen India’s reliance on dollars.

Even though the rupee will never be able to compete with the dollar as a reserve currency, this is still a positive step. An increase in the number of countries that invoice in rupees will stimulate growth in bilateral trade with India.